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I bond rate slashed nearly 2 percent
By Laura
Bruce • Bankrate.com
The I bond, the savings bond designed
to make sure your return doesn't lose out to inflation, is looking
mighty unattractive for the next six months.
I bonds purchased between now and the end of October
2002 will earn a composite rate of just 2.57 percent. That rate
includes a 2-percent fixed rate and an annualized inflation rate
of 0.57 percent.
 The
2.57 percent composite rate is a steep drop from the 4.40 percent
rate set last November.
The U.S. Treasury sets the fixed rate and the inflation
rate every May 1 and Nov. 1. The fixed rate you receive when you
buy an I bond is good for the 30-year life of the bond. The inflation-indexed
premium is adjusted every six months.
The EE bond, which also receives a new rate every
six months, is now at 3.96 percent, down from 4.07 percent last
November. The EE bond is now known as the Patriot bond.
Daniel Pederson, president of BondHelp.com and author
of Savings
Bonds: When to Hold, When to Fold and Everything In-Between,
says he's surprised the Treasury didn't increase the I bond's fixed
rate, which has been at 2 percent since November 2001. Increasing
the fixed rate a bit would probably encourage more people to buy.
"Historically, the I bond needs a fixed rate
of 2.6 percent or higher to outperform the EE bond. I give the edge
right now to the EE bond. If the long-term decision is to put money
in a safe investment, I would lean to the EE bond, the Patriot,
for the next six months."
Pederson says the reason the I bond rate dropped so
much compared to the drop in the Patriot bond is because the I bond
rate is tied to inflation, which has been unusually low, while the
Patriot bond is pegged at 90 percent of the average yield of the
five-year Treasury note for the last six months.
"If we get normal inflation over the next six
months, say 2.55 percent, then the I bond will pop back up to 4.5
percent in November," Pederson says.
If you already have an I bond, the only change that
affects you is the inflation premium. The inflation premium you
receive changes every six months.
For more detailed information on I bonds and
how they work, read
this Bankrate story.
-- Posted: May 2, 2002
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